EFAMA TER Report aims to improve fee transparency

By: Caroline Allen | 05 Oct 2011

An independent report commissioned by the European Fund and Asset Management Association (EFAMA) on total expense ratios (TERs) reveals that, on average, UCITS fund managers retain around 42% of fees and charges, while most of the remaining 58% is paid in retrocessions to distributors and other operating services such as administration.

It also shows that investment management fees in Europe are on average about three basis points greater than management fees in the US across all asset classes, despite US economies of scale.

EFAMA commissioned the report from consultancy Strategic Insight, which has studied mutual fund fees and expenses for two decades, as part of its aim to improve transparency and understanding of cost breakdown of European mutual funds.

While it is currently possible to project the TER through mutual fund expense information, it is not possible to deconstruct the ratio to fees collected by distributors, administrators and custodians and what is retained by the fund management firm, the organisation said.

Bundling of distribution and management fees has made it difficult to understand the costs charged by various types of organisations in the fund value chain. The report benchmarks how much on average of European funds’ TER is paid to investment managers, fund distributors and other services providers such as fund administrators and custodians.

Data was compiled in early 2011 from the responses of 17 EFAMA member firms, excluding any affiliates, and accounting for over €1trn in equity and bond EU-domiciled funds as of year-end 2010. The data is aggregated by fund type and distribution channel.

The differential between European and US TERs could be attributed to the fact that European players operate against a backdrop of 27 languages and varying local regulatory and tax regimes, further increasing their costs, noted EFAMA.

As the European fund industry expands and matures, operational efficiencies should enable the reduction of fund expenses over the medium and longer term. Evolution could be enhanced through greater ongoing clarity and transparency with the breakdown of fees in the fund value chain.

The organisation, with new president Claude Kremer (pictured), previously head of the Luxembourg funds association, noted that UCITS IV promises to facilitate scale efficiencies through cross-border mergers and master-feeder structures enabling lower investment management fees.

Massimo Tosato, Vice-President of EFAMA and Chair of the TER Working Party Group, comments: “EFAMA has long argued that transparency needs to be improved at the point of sale and harmonised for all products. We would also encourage a similar transparency within the EU across all long term saving solutions, including insurance and structured products.”